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You can’t be sure of Shell, says the City

The Guardian: You can’t be sure of Shell, says the City

With an investor charm offensive this week and a terrible year behind them, executives must be nostalgic for the group’s imperial past: “Shell will this week make a desperate attempt to draw a line under the oil reserves scandal…”

TERRY MACALISTER

Sept 18, 2004

Shell will this week make a desperate attempt to draw a line under the oil reserves scandal that has dogged the company since the start of the year by outlining its strategic plans for the future.

But chairman Jeroen van der Veer and his exploration boss, Malcolm Brinded, will hold the critical briefing in the City on Wednesday with menacing storm clouds hanging over their heads.

While Hurricane Ivan forced the Anglo-Dutch oil giant to shut down platforms in the Gulf of Mexico earlier this week, a verbal hurricane – emanating from its dismissed former chairman Sir Philip Watts – was blasting the Financial Services Authority.

Sir Philip is furious about the way in which he has been treated by the regulator, and by challenging its findings has once again ensured that the reserves issue will remain foremost in many people’s minds.

The demand for an appeal has also raised expectations that Sir Philip could challenge his removal from Shell – not good news for a company facing continued regulatory investigations as well as potentially costly legal cases from angry American shareholders.

Despite all the trouble, the biggest issue for Shell in the eyes of most investors, however, remains the complicated structure of the dual-listed group. Its decentralised decision-making and confused hierarchy is seen as the main stumbling block to success.

Fortunately, corporate governance is the one issue Mr van der Veer will legitimately be able to sidestep because he has repeatedly made clear there will be a separate briefing on this in November.

But with so many other unresolved problems, Mr van der Veer will be dogged this week with as many questions about the past as the future.

The last nine months have been tough for Shell not only because of damage to its reputation and the management upheaval, but also because it has been a period of relatively poor financial indicators, despite sky-high oil prices.

Shell shares have beaten the UK market by 10% since the near-25% cut in reserves figures, but they have underperformed arch-rival BP by 4% and been left with a price to earnings discount of 13% to its competitor.

Analysts at Deutsche Bank argue Shell is also trailing the top five oil majors in return on capital employed, while yesterday Dresdner Kleinwort Wasserstein downgraded its recommendation on the company’s shares. The average return on capital employed for the industry leaders is a shade under 20%, while Shell is struggling to produce 16.5%.

Meanwhile, the group has been forced to increase its capital expenditure in the critical exploration and production division to boost output from existing fields. But some of this cash has been siphoned off to make up for unforeseen costs on the Sakhalin Island scheme in Russia and the offshore Bonga field in Nigeria.

JJ Traynor, an analyst at Deutsche, says shareholder confidence will not improve while upstream project management continues to be “poor” at Shell – which used to pride itself on technical excellence.

While the Anglo-Dutch group needs to catch up on reserve replacement upstream, it is also likely to see oil and gas output falling by up to 5% both this year and next.

In refining and marketing, Shell has been through a period of heavy asset sales in an attempt to concentrate on higher performing businesses.

About $10bn (pounds 5.6bn) worth of holdings have been thrown overboard already or are on the block for 2005.

“We are continuing our divestment programme to take advantage of good asset prices and recycle capital into higher value opportunities,” it argued.

But the disposal programme has also had the effect of highlighting some gaffes – the major discoveries in Rajasthan which have propelled Cairn Energy into the FTSE 100 index were found on acreage sold for a song by Shell.

Rather than delight the City, the sales have raised fears that the company could go on a dangerous spending spree with the proceeds.

The last time Shell became acquisitive it bought Enterprise Oil for what was deemed by sector analysts to be an unrealistic premium. Recently the biggest merger and acquisition story to be linked to the troubled oil major is whether it could become a bid target for others.

BP and Total – both mentioned by analysts as potential predators for the company – have dismissed the idea either privately or publicly.

The fact that this has been aired at all is a sign of how a once powerful empire has been brought to earth.

On Wednesday, the City will be most interested in hearing how Shell’s upstream portfolio is going to be restructured and reinvigorated in order to raise reserves and bring forward more production.

But the chances are that the briefing will be a broad-brush affair that will be long on general principles but short on actual detail.

The reality is that the mountain of legal and regulatory problems have taken up so much management time that Mr van der Veer and his team have spent the summer firefighting rather than surveying future strategy. Fortunately the City – it seems – has grown accustomed to Shell failing to live up to expectations.

The chances are that the briefing this week will be something of a damp squib -but the stock market will be quite forgiving and its shares will not take a hammering.

John Syropoulo, an oil analyst with HSBC, sums up the general sentiment towards the group – which seems to be driven more by compassion than frustration.

He says of the forthcoming presentation: “We are some way off getting clarity. I don’t expect too much.”

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